Apple App Store Lawsuit: Company Defense Against Monopoly Allegations

Apple has been sued in federal court for its alleged monopoly over iPhone applications with its App Store — a charge the company denies. This case is one in a string of many regarding Apple’s aggressive use of intellectual property (“IP”) laws to protect the value of the company and its assets. Other cases include Apple suing Amazon under the claim that Amazon’s use of “Appstore” was false advertising, and Apple winning a massive lawsuit against Samsung for violating its design and utility patents for touchscreen devices.

Although Apple’s strategy may seem to have the potential to hurt rather than help the company, it’s likely the tech giant is planning to leverage its patent portfolio to create more revenue licensing its patents to businesses than selling its software to consumers. Apple is positioning itself to be the IP leader for consumer electronics.

In its most recent case, Apple is claiming that it does not have a monopoly with its App Store. The App Store is a distribution channel for applications, facilitating their purchase and managing the associated commerce. While Apple takes a 30% cut of transactions, the company neither sets or regulates the pricing of applications on its store.

At the core of the case is consumers’ frustration with Apple’s closedness. Apple manufactures its products soup to nuts, creating beautifully designed technologies. Apple’s commitment to a closed model has allowed it a great amount of control over its product development. It has enabled the company to brilliantly create new markets for consumer goods — iMac, iPod, iPhone, iPad — and Apple’s sterling products have enabled it to become one of the world’s most successful companies. Apple’s brand is synonymous with quality, a reputation that the company cannot afford to sacrifice.

However, Apple’s closedness could soon become more of a problem than a class action lawsuit. Apple’s biggest competitor in the mobile space, Google, takes an entirely different approach to mobile operating systems and applications. Instead of operating closed systems, Google promotes openness. Following these opposite strategies, the two giants are battling for the greatest share of the mobile market as it continues to develop. Google’s Android mobile OS is open, and as a result offers a much greater number and variety of applications. Apple devices individually produce more revenue than an Android’s, and they have the greater market share in the U.S. Android has much greater market share globally. "The core strategy is to make a bigger pie," said Google Chairman Eric Schmidt. "We will end up with a not perfectly controlled and not perfectly managed bigger pie by virtue of open systems."

As Google is winning the land grab, Apple is not sitting as comfortably on its throne. The company’s closed model is revealing serious disadvantages on the global stage. A closed approach may prevent the company from competing as successfully as possible with Google and possible future challengers — Tizen, Ubuntu, and FireFox OS — as new markets open that don’t support Apple’s traditional customer demographic. More importantly, other companies have been able to emulate Apple’s secret sauce — consumer experience above all! — narrowing Apple’s advantage in the consumer market.

In these circumstances, it should come as no surprise that Apple is falling back on its IP portfolio to protect its market position. Generating revenue by suing other companies is not the ultimate goal of Apple’s recent lawsuits. Rather, each case that Apple wins confirms the validity and enforceability of its patents to its competitors. Apple can then license its patented technologies and designs and charge Google and other competitors for using them, piggybacking on their competitors’ success.

It would appear that Apple’s business model is evolving into two modes. First, use a closed model to develop innovative technologies for sophisticated user markets; patent the utilities and designs that the company engineers. Second, license those utilities and designs to businesses that wish to use them. So long as Apple continues to be the first of its competitors to patent new technologies, combining both modes would create serious revenue for Apple and help it maintain its leadership position.